Hack the market

rebranding opportunity?

A friend of mine pointed out an article he came across on his bloomberg terminal today which reminded him of a strategy I’d described to him sometime back and which we’ve been trading over the past year or so with good results.

To the great chagrin of some of my partners, I even wrote a few posts about the phenomenon underlying our strategy and its evolution as we capitalized on it.  Eventually, they persuaded me to shut up already, but the outline was there for all – including Goldman! – to see.

My first post on the topic, “unsung virtues of a dynamic hedge” published June 4th of last year, was pretty coy and didn’t mention the source of alpha itself but talked about enhancing it with a dynamic hedge.

My next post on the topic, “to dream” was published July 14th of last year and laid out the exploitable discrepancy of the market’s behavior.  Interestingly, the data I provided in that posting went back the same amount of time as in Goldman’s piece.

I explicitly wrote one last time about the strategy in “evolution of a strategy” wherein I detailed the process by which we’d been evolving the strategy.

Now, one of the more entertaining things about having a blog is that you get to see who is viewing your content.  I’m happy to note that all of the major IBs are represented including a variety of distinct IPs within Goldman.

Now, I’m not accusing them of stealing my ideas or anything untoward like that… but I’ll admit that I am wondering how long it’s going to take them to make similar observations across markets beyond US Equities…

Read on for the Bloomberg article…

From the Bloomberg article:

By Alexis Xydias

March 12 (Bloomberg) — Investors should take advantage of others’ “fear” of the night, according to a study by Goldman Sachs Group Inc. that shows holding U.S. stocks overnight since 1993 would have quadrupled an investment.

Buying futures on the Standard & Poor’s 500 Index, or a fund that replicates the benchmark for U.S. equities, just as the trading session ends and selling them when the market opens the next day has yielded 309 percent since 1993, New York-based analyst Peter Berezin wrote in a report sent to clients today. The inverse strategy lost 58 percent.

Investors and traders may have become more reluctant to hold securities overnight, when they’re unable to react to market declines abroad, Berezin wrote. The S&P 500 has plummeted 54 percent since reaching a record in October 2007 as the crisis in credit markets and the collapse of banks including Lehman Brothers Holdings Inc. hammered equities, while the Chicago Board Options Exchange Volatility Index, the so-called gauge of fear, has more than doubled.

“A large number of market participants are averse to holding overnight positions, which causes them to sell at the close (thereby depressing intraday returns) and buy at the open (thereby inflating overnight returns),” Berezin wrote. “Such aversion to overnight risk is likely to be higher during bear markets.”

Overnight Spread

The difference between market-close and market-open prices has widened to 9 basis points since October 2008, the study said, from a “long-term” average of 5 basis points. A basis point is 0.01 percentage point.

The best way to benefit is to hold the S&P 500 at night, while short-selling it during the day, Berezin wrote. The strategy would have returned 507 percent in the period, the analyst said, while acknowledging the increased costs of such a trading-intensive strategy. Short-sellers sell borrowed securities on expectations they will be able to repurchase them at a cheaper price before their loan is due.

The S&P 500 reached 666.79 on March 6, the lowest intraday level in more than 12 years. The benchmark index for American equities has fallen 20 percent this year.

“Even when one is pondering less trading intensive strategies, the analysis above suggests that there is a cost to be paid for avoiding overnight risk,” Berezin wrote.

back-testing, dereferenced, strategy development